The International Monetary Fund (IMF) on Monday said Sri Lanka has shown a solid performance in the face of recent external conditions and the measures taken to achieve the macroeconomic stability are commendable.
Addressing a media conference in Colombo Monday, IMF's Deputy Managing Director Naoyuki Shinohara said the government however, still needed to build a policy buffer to address unexpected events.
While commending the authorities for delivering strong growth, low inflation, fiscal consolidation, and a strengthening of the external accounts since the end of the war in 2009, Shinohara attributed Sri Lanka's macroeconomic stability to ambitious growth and development objectives laid out in the Sri Lankan President's future plan Mahinda Chintana.
The IMF expects Sri Lanka's economy to grow 6.5 percent this year and continue for the next year, the IMF official said.
The IMF official, who was on a two-day visit to Sri Lanka last week, has held discussions with Sri Lankan authorities.
The visiting IMF team met with senior Government officials and the private sector and also toured Hambantota and Kandy during their two-day tour.
"Our discussions focused on how to accelerate and sustain growth, ensure macroeconomic and financial stability, and take advantage of regional and global integration," the official said.
He said the fiscal consolidation has been steady, and the Sri Lankan authorities are committed to further reduce the budget deficit and public debt, which remain relatively high. The Sri Lankan government plans to reduce the budget deficit to 5.8% of the GDP in 2013.
Shinohara said he supports the government's efforts to boost revenues by broadening the tax base and strengthening tax administration - creating opportunities to further reduce the deficit while raising public investment.
"Private investment, including FDI, could be supported through improvements in the business environment and a broad dialogue with stakeholders. Finally, I noted that a strong outward orientation has supported rapid growth in key Asian economies and remains an appropriate strategy for Sri Lanka," the IMF official said.
In terms of macroeconomic management, Shinohara highlighted the importance of pursuing a cautious monetary policy, keeping in mind Sri Lanka's past challenges with inflation, the risks posed by Fed tapering, and the need to assess the impact of monetary easing already undertaken.
Shinohara said he expects Sri Lanka to continue its flexible exchange rate regime allowing it to serve as a key buffer against external shocks while reserves are allowed to rise to more comfortable levels.
"The IMF will continue to work closely with the authorities to provide high-quality policy advice to enhance stability and growth," the IMF official said.